Economics, Policy and Government

On Balanced Growth of India

Development inclusive of people in rural areas is not really distinct from development in general. Indeed it is not possible to have real development while excluding the majority of the people — the majority of Indians are rural.

Generally speaking, Indian rural populations and subsistence agriculture are almost exactly congruent notions. As long as that equation persists, India will continue to be underdeveloped and poor. The reason is that subsistence agriculture does not scale, and therefore the productivity is bounded by a very low limit.
One can move beyond subsistence agriculture by raising agricultural productivity. There are two distinct ways of doing that.

Case A: You raise the productivity of agriculture by some means such as using more capital (more mechanization and more energy, for instance). Basically, you “pull” the productivity up without any provocation such as a shortage of labor.

Raising productivity means the same (or even increased) production requires less labor. The surplus labor can then just sit around in the rural areas or migrate to the urban areas to live in slums. Here the labor is “pushed” out of agriculture as a consequence of the pulled up productivity.

I call it the “productivity pull, labor pushed” scenario.

Case B: You somehow “pull” labor out of the agriculture. There are many ways but let’s just say that industry is booming and requires labor. That means jobs in the manufacturing sector. Also imagine that the manufacturing sector jobs require some degree of skills but which can be acquired in a short time and on the job itself. So the labor gets pulled out of agriculture and into manufacturing. Now agriculture gets “pushed” to increase its productivity because there is a shortage of labor in the rural sector.

I call this the “labor pull, productivity pushed” scenario.

The two scenarios have distinct distributional outcomes. In the first case, average incomes in the rural sector don’t go up. Those who continue to be employed in agriculture do see their incomes go up because of greater productivity but that is balanced by the lowered incomes of those who are rendered unemployed. The increase in productivity merely takes from one segment of the rural labor force (those previously employed) and transfers that to those who remain in agriculture. Furthermore, there is no labor linkage between the non-agricultural and agricultural sectors.

In the second case, the average rural income goes up. Increased productivity means increased average income because the labor force has contracted. The labor released from agriculture ends up in manufacturing. Their incomes in manufacturing is higher than what it was in subsistence agriculture. So the average income of the total rural labor force (which was previously only in agriculture but now is distributed in agri and non-agri work) goes up.

That is what can be called “inclusive growth.” It is a consequence of balanced growth. To recount, the story goes this way:

1. Increase capacity in the non-agricultural sector, such as increased manufacturing or services.
2. This pushes demand for labor in the non-ag sector.
3. Labor from rural areas (agricultural labor) is pulled to urban areas.
4. Shortage of labor in agriculture pushes productivity increases in agriculture.
5. Incomes go up for the entire group that used to be previously only in agriculture.

Why do average incomes go up when labor moves from agricultural to non-agricultural sectors? Because agriculture does not admit scale economies while manufacturing and services sectors do. That’s just the way it works.

Which is why urbanization and economic growth are conjoined twins: you cannot have one without the other. Economic growth is what happens when the labor moves from agriculture to manufacturing and services. Which is another way of saying that when people move from rural areas to urban areas. But that move has to be pulled rather than pushed (in the sense I have defined them above.)

It is interesting to note that sometimes the solution to a problem does not lie in the same space as the problem. This is one such case. The problem of rural inclusive growth has a solution but that solution lies in non-rural areas and in non-agricultural sectors. India’s misplaced focus on rural areas (as opposed to a focus on rural populations) has done a lot to promote mass misery and poverty.

As Einstein had famously observed, no problem can be solved from the same level of consciousness that created it. The mindset that created the impoverishment of rural populations was one which did not understand the economic linkages that connect all sectors of the economy. It was a mindset that separated villages (and even elevated them) and tried to make them “self-sufficient.” Persistence of that mindset guarantees persistent poverty in rural areas and rural populations.

We can spend a lot of time debating how entrepreneurship and innovation in rural areas will help the rural people. But that will be of limited use until one re-evaluates the problem of inclusive growth in terms of the growth of urban India. The solution to rural India lies in the urban India that is waiting to be born.

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4 thoughts on “On Balanced Growth of India”

Very interesting thoughts Atanu. But have you gone into details of each of these models — details such as actual numbers on how much manufacturing GDP is required to pull out *enough* people from rural areas into productive engagements, so that rural agriculturalists are bound to improve their efficiencies? Numbers will be important for a sanity check on the appropriateness of a model.

On the same track, I am always puzzled on how do governments actually compute numbers while designing policies. Do they go into economic modeling, behavioral modeling, etc, or do they just pull out numbers from their hat?

you are proposing ‘pulling labor’ out of agriculture and into industry since the latter provides higher income opportunities as compared to the former. In this context, a recent report (http://economictimes.indiatimes.com/Opinion/Policy/Emulate-Gujarats-agricultural-success/articleshow/4493375.cms) about the success of the Gujarat Government’s Krishi Mahotsav based agricultural development model is well worth some consideration. The article virtually confirms Mr. Modi’s proclamations of achieving near 10% agricultural growth over the past 6 years in Gujarat since 2002. Farmers incomes have doubled during this period. The migration from rural to urban areas has also come down due to the availability of basic amenities like electricity and water. This experiment clearly shows that given the right kind of support and encouragement, agriculture can be a very promising income generating opportunity in its own right.

plodder, I am not proposing “pulling labor” out of agriculture. I am not in favor of pulling people out of anything that they are engaged in doing. If you read what I wrote, I said that if the manufacturing sector expands, and if the productivity of agriculture improves, then labor will move from agriculture to manufacturing. There is no coercion involved. Let’s keep that at the forefront of our discussion.

Dear Atanu,
I fully understand and accept your point that your ‘labor pull’ strategy is completely voluntary. That was certainly not my intention. But it definitely looks like I need to clarify my earlier statement.
I am basically questioning the scenario in Case A where a direct focus on increasing agricultural productivity will lead to surplus rural labor and consequently increased rural-urban migration. The latter (namely migration) has certainly not happened in Gujarat (also see http://www.business-standard.com/india/storypage.php?autono=320640).
I do agree that surplus rural labor is a logical consequence of increased agricultural productivity. However, agriculture also requires the same kind of reliable infrastructural support and inputs that industry needs, namely water, electricity, good roads, access to markets and so on. The Gujarat experience shows that reliable rural infrastructure has not only increased agricultural output but also led to a move up the agriculture value chain with the establishment of agro-based industries like rice mills, dairy farming, fisheries and the adoption of lucrative agricultural crops like fruits and vegetables. In fact, it has also led to the migration of non- agro based industry like diamond cutting from urban to rural areas. I think the availability of additional job opportunities in rural areas could very well be the reason for reduced rural-urban migration.